Tiffany (TIF) reported disappointing first-quarter results and cut its 2012 outlook on weaker-than-expected demand for jewelry. Though we expect to ratchet down our near-term earnings assumptions for the company, we don't expect the impact to be material to our fair value estimate range (click here for more information on how we derive our fair values).
The firm's sales advanced 8% in the quarter led by roughly a 4% increase in comparable store sales. Management noted that revenue expanded as expected in regions outside the Americas, but the Americas region underperformed during the period with comparable store sales coming in flat (and sales in its New York flagship store declining 4%). Sales in the Asia-Pacific region, Japan, and Europe increased 17%, 15%, and 3%, respectively.
Net earnings only expanded 1% from the same period a year ago. However, excluding non-recurring items from the prior-year period, net earnings would have declined 5%, a very poor showing, especially given that aggregate revenue expanded at a high-single-digit clip. Tiffany's gross margin dropped roughly 100 basis points from the same period a year ago, as product acquisition costs increased at a faster pace than sales. Overhead expenses (SG&A) also expanded faster than revenue growth, further pressuring the operating line. Inventories swelled considerably during the period, but the firm expects them to actually come in lower than original expectations by the end of the year. We're skeptical.
Looking ahead, management indicated that the pace of worldwide sales at Tiffany has decelerated from first-quarter levels of 8% and are now advancing at a low-single-digit pace. However, Tiffany only cut its 2012 outlook to 7%-8% top-line expansion (was 10%), which we think may still be too high given the current revenue trajectory. Management also cut its bottom-line outlook to the range of $3.70 to $3.80 per share from $3.95 to $4.05 per share. We think this updated range, too, may now be too high given gross-margin trends.